Dealing with natural resource extractors

You have multiple use of your land whether you want it or not. The state claims ultimate domain, but aside from that there are a host of others who have an interest in your land and how you farm it. Hunters, people who would like to gather woodland products, such as firewood and edible plants, people concerned with the quality of the water which leaves your land (since they catch some of it for use down stream), people who need right of way, such as electricity, water, and telephone companies, and those interested in extracting natural resources, such as coal, timber, gas and oil.

People in the last group require very careful attention, because they have the capacity to provide considerable income, and also to do considerable damage. The product they remove has great value, they use large machinery, frequently requiring them to borrow a lot of money, which means they are always in a hurry-up mode. They employ people who receive good wages for skilled work, so they have large expenses, too. They are invariably in it for the money, and you have to negotiate details of what they do on your land. Both you and the businessman want to get as much for yourself as possible out of the difference between what he gets for the material extracted and his expense.

The extractor usually has a much larger business than your farm, He deals with land owners frequently, with the resulting advantages in knowledge of applicable law and business practice. Oil and gas drillers, for example, associate with other oil and gas drillers and with lawyers who practice oil and gas law. And they take out leases frequently, so they are familiar with what land owners will try to get. You can usually deal with them on such matters as where a new right of way will go, location and type of fences to be built, size of culverts, and other things related to your farming operation. Large corporations will have specialists in dealing with various personality types among land owners. If one can’t connect with you, they will send another, perhaps tougher, agent.

Companies offer a standard payment, which may be a fraction of the value of the product removed, such as one-eighth royalty, or a price for some unit of measurement, such as a ton of coal. Getting a higher price than the standard is difficult. You may be offered less, so you have to find out what the standard is. In cases where the product is going to produce greater value for the extractor, such as low sulfur coal or thin cover over coal, you may be able to extract a premium, but you really have to study thoroughly, know what you are doing and negotiate well.

With timber it may pay to hire a registered forester. He can “mark” trees to be removed, sparing small trees to regenerate the timber. He can “walk” the tract and make measurements to get a very accurate estimate of the timber will to be removed by cutting the marked trees. He can arrange bids for the sale and oversee the cutting operation to see that the laws are followed on your land. This will cost about 8 or 9% of the sale price, but many think it is worth it, not to have to deal with the timberman, especially on large tracts or high value timber. I sell small amounts of good timber and some low grade timber myself from time to time.

Since you make a sale of this sort infrequently, think, think, think about what is going to happen. Once the contract is written, it is written in stone. Errors and omissions can seldom be corrected. You need to think about where roads will be bulldozed, where spoil will be deposited, where piles of trees will go from well platforms (and what their sale value is, because you are entitled to that, even if the value is too small to market). You need to think about where and what kind of fence you will need during and after extraction. Where will check dams be needed, and where will the rock come from? Is there a spring that needs to be protected? Try to visualize what will happen. Go to sites the extractor has worked on previously. Ask the landowners there what they learned.

You must read the contract very carefully – you are the one ultimately responsible for your interests. Think about what each paragraph does for the lessee. Does he need the thing it gives him? Does it give more than he needs? For example, does the lease specify the geologic formation that is his target? It should not surprise you that the lessee will frequently use wording which gives him formations beyond his immediate objective. An example of this is a coal lease which is sought for a seam near the surface, but which allows the lessee to take ownership or extraction rights for all coal, no matter how deep. In general, minerals become more valuable as time passes, so your heirs can loose out big time. Another hazard is paragraphs concerning liability. You should not put yourself in a position where you become liable for negligence or mistakes of the lessee. The lease should expressly say the lessee assumes responsibility for his accidents. What about damage to your business, such as cows being killed by drinking water from the process, or being killed by the operation? Read it all. Read it several times. With your mind “in gear.”

A lawyer can be of some help, especially if he/she has experience with the industry on large dollar items. A lawyer would be familiar with technical terms, and if familiar with the industry, that is, with common practice in the industry. Remember, though: 1. the lawyer is in it to make money, too, and 2. if he is in the mineral extractive industry it is most profitable for him to mind his interests with the industry. This is not to say a lawyer will routinely try to get you to sign a lease that is not good for you, but he can’t be expected to alienate a segment of his potential clientele. Lawyers are most dangerous in connection with major utilities, and in situations where you have a serious adversarial position with the mineral extractor. If you are trying to sue a utility, you need a lawyer with serious ethical commitment.

You are a land owner, but that is a kind of business, and ultimately you will have to live under the conditions of the contract. Don’t expect someone else to carry your responsibility for you.

When the extractive process is going on, try to remain business like and in contact with the person in charge of the operation. Appearing interested in the process will do more at less expense than any other tactic you can employ. If there is a problem, discuss it, but don’t expect to get expensive changes. Don’t expect to “get tough” – the extractor will doubtless have dealt with many trying that before you. Make notes and take pictures of the action, before and after pictures, and pictures of problems that arise. This is a record, and it is proof of how things were at a certain time.

Dealing is knowledge-based work. You may have to hire help in the form of a lawyer, but remember he is your employee. His function is to give you advice in his area of expertise, not to run your business. Ask for alternatives. Ask "What will happen if I do so and so?" Try to be creative – think of things that others are not thinking about. You are the one to get the profit or loss. Your mineral royalty is much more important to you than it will be to the lessee or the lawyer.

Don’t ever threaten anyone. That is guaranteed to take you downhill in a hurry, with no return. Do what you have to do tactfully, but don’t loose your self-respect and your contact with the other party.